De Beers approach to synthetics, and what it could mean

In the latest Rapaport magazine (July 2018 edition), Martin Rapaport wrote an opinion piece titled “De Beers’ Synthetics”. A summary of his article is as follows:

Martin begins his article by looking at the historical role that De Beers played for the last hundred years, where they were seen as the custodian of diamonds. De Beers managed pricing of rough diamonds by buying excess supplies of non-De Beers rough, and then spending close to $170 million a year in generic marketing, year on year, coining terms such as “ A diamond is forever”.

In 2000, several major mines in Australia, Canada and Russia decided to go their own way and not be under the De Beers banner. De Beers found themselves with a $5 billion inventory of diamonds. Soon enough, it was clear that they were no longer prepared to spend all that marketing money helping others. It was around this time that De Beers moved from a family orientated business to one of a corporate business answerable to its shareholders.

According to Martin, De Beers still remains the dominant player with 42% of the rough diamond market (my sources tell me it’s more like 30 to 35%), but I will defer to Mr Rapaport.

At this point Martin makes some very definitive statements such as “De Beers is a corporation with no emotional attachment to diamonds or the trade. Those who believe in De Beers and expect it to protect them and their diamonds are living in the past.”

As I pointed out in my last article, De Beers has a natural diamond business worth approximately $6 billion. Martin quotes $5.3 billion (let’s not quibble about 700 million amongst friends). Their two major investments in South Africa and Botswana are very much dependent on the relationship with the local government.

As in my previous observations, and like many in the trade, there is no doubt that there is an exciting opportunity with synthetic diamonds. To quote Martin “to sell new diamonds that will appeal to a new generation of millennial consumers”. Who is in a better position than De Beers to understand the low cost of production with an incredibly detailed knowledge and expertise around the demand-side diamonds?

The issue Martin points out is that De Beers believes they can maintain a dominant position in both the natural and synthetic diamond markets. Martin believes they clearly cannot – “De Beers can’t dance at two weddings at the same time”.

Well, apologies Martin, but they can and they are. The question is how does that work?

De Beers contends that they have lowered the price of synthetics to such a point that it will become purely a fashion item, which they intend to commercialise very successfully. The idea is that this will destroy those who are profiting at the high end from building any value at the upper end where synthetics are being sold as the alternative to the engagement ring market.

As Martin correctly points out, this hasn’t stopped, nor will it stop those who wish to draw a direct comparison between the two. In other words, if a customer comes into a retail store and wishes to buy a diamond engagement ring, the retailer now has the option to offer the client a natural diamond of approximately 70 points or a synthetic diamond 1.57 ct in size for similar money (this calculation is based on the prices that De Beers is quoting for synthetic diamonds and not what we have currently seen in the Australian marketplace). On a local level, and not getting into the different types of lab grown diamonds ,a 1ct F SI1  round brilliant cut lab grown diamond wholesales in Oz  for approximately $5000 compared to a  mined diamond of the same grade  which is $8000-8500 AUS, equating to a 60% difference at wholesale.

Let’s not be naïve, I don’t care how good a salesperson you are, you will have a difficult time convincing a customer that they should buy the smaller stone. It’s a reasonable assumption to make that as the prices of synthetic drops, the demand for synthetics will increase at the expense of natural diamonds. With clever marketing and an easier pitch, which every salesperson could easily defer to, it could have a significant negative  impact on the demand for mined diamonds.

It’s at this point that I diverge from Martin’s conclusions. Martin concludes his article with the following statement – “If the most important thing to you is profit, then go ahead, sell anything to anyone at any price. However, if you and your business have real values that transcend profits, take a pass on synthetics”.

Selling a product, whether it’s a diamond, a sapphire or a loaf of bread, has no bearing on your morality, as long as you are honest and transparent as to what you are selling. It is ridiculous to suggest this. Thousands of retailers who are struggling to compete with the new world order don’t need this type of “moral judgement” Every business needs to make its own carefully considered decision.

Let’s not be naïve, there is a window of opportunity for those who wish to cover all their basis in selling both lab grown and mined diamonds in the same store. However, they need to accept that it may or may not come with repercussions. Please don’t misconstrued this statement, I am not suggesting you will get yourself into trouble or suffer because of it. I am simply stating the obvious – you need to contemplate how this may impact your brand and positioning.

Alternatively, those who wish to either maintain of define themselves by the quality of selling mined diamonds, and not selling synthetic diamonds, will carve out their niche, as being a purveyor of fine natural gemstones, but do so foregoing this new option.